By Adam Cmejla, CFP®
March 24, 2021
We’re dealing with a global pandemic that has disrupted almost every aspect of our daily lives, and if 2020 taught us anything, it was that the only thing that remained constant was change.
Congress recently passed another giant piece of legislation, the American Rescue Plan Act, to aid our country as we continue to battle the COVID-19 pandemic. Here are key sections of the legislation that optometric practice owners should understand and plan for in 2021.
Tax Treatment of EIDL Advances
Economic Injury Disaster Loans (EIDL) advances are not included in the gross income of the person who receives this grant. All deductible expenses that were paid with those funds are able to be deducted on the applicable return. For S-corp business owners, the income is to be recognized as tax-exempt income to the business, and basis increase for S-corporation owners is also allowed.
The First $10,200 of Unemployment Benefits Are (possibly) Not Taxable
If you were an OD who filed and received unemployment benefits in 2020, the Act stipulates that the first $10,200 of benefits received will be tax free. This is only applicable if your AGI (Adjusted Gross Income) is <$150,000 regardless of whether you file single or MFJ (married filing jointly).
Important note: if you’ve already filed your 2020 tax return, the IRS has provided a special notice asking you to NOT file an amended return. The Service will communicate in the near future how it plans to retroactively reconcile already-filed returns that would have qualified for tax-free unemployment benefits.
The FFCRA (Families First Coronavirus Response Act) Sick/Leave Pay Extension and Expansion
The government has yet again extended the period of time in which a business can provide paid sick leave to employees through a credit against payroll taxes. This program was extended through September 30, 2021, with an important “reset” date of April 1, 2021. The reset date is important—it could provide an additional 10 days of FFCRA paid sick leave beginning April 1, 2021 and the practice would be eligible for a tax credit for doing so. However, this is voluntary—the business owner is not obligated to provide this benefit.
Furthermore, the credit is now based on the following changes:
• The credit now includes the employer’s portion of Medicare tax as well as Social Security tax paid (previous legislation was only a credit against Social Security tax)
• Additional qualifying reasons include vaccine appointments and complications due to receiving the vaccine
• The limit on the credit increases from $10,000 to $12,000 per employee
Continuation of the Employee Retention Credit
This is a big planning strategy for OD practice owners to evaluate in conjunction with Paycheck Protection Program (PPP) funds that were used in 2020. The notable updates to the ERC are as follows:
• The Credit will be available through 2021
• The amount of qualified wages remains up to $10,000 per quarter (in 2020 it was $10,000 in total) and the maximum credit is 70 percent of qualified wages (up from 50 percent in 2020).
Other Articles to Explore
The reason this last section is a notable planning strategy for OD practice owners to consider is because of the loosening of PPP guidelines in 2020. With the (a) option of a 24-week covered period under PPP and (b) a reduction in the total amount of PPP funds that need to be used for payroll expenses (60 percent), a practice owner should research and consider the following strategy:
1. Did the practice suffer a decline in revenue of more than 50 percent compared to the same calendar quarter in 2019? (For most practice owners, look at 2Q 2020 compared to 2Q 2019.)
2. If yes, do the math and determine if you’re able to allocate more of your PPP funds (up to 40 percent) for non-payroll, but still covered expenses, under the year-end. Congress expanded the definition of non-payroll covered expenses under PPP in the end-of-year “COVID Relief Bill” that was passed in December 2020. Taken straight out of that bill:
a. “…payment for any business software or cloud computing service that facilitates business operations, product or service delivery, the processing, payment, or tracking of payroll expenses, human resources, sales and billing functions, or accounting or tracking of supplies, inventory, records and expenses.”
3. If you’re able to account for 40 percent of your PPP funds on non-payroll expenses, the other 60 percent will be used for the mandatory 60 percent minimum payroll test that the government requires in order to qualify for forgiveness.
4. For additional payroll expenses incurred in the same quarter, but not paid for with forgiven PPP funds, work with your accounting team and payroll provider to retroactively claim the Employee Retention Credit.
Even though 2020 is in the rear-view mirror, continued diligence and monitoring of planning strategies discussed last year are still beneficial. As always, proactive communication with your professional team is paramount to your success.
Adam Cmejla, CFP® is a CERTIFIED FINANCIAL PLANNERTM Practitioner and Founder of Integrated Planning & Wealth Management, LLC, an independent financial planning & investment management firm focused on working with optometrists to help them reach their full potential and achieve clarity and confidence in all aspects of life. For a number of free resources, visit https://integratedpwm.com/ebooks/ and check out the “20/20 Money Podcast” to get more tips on making educated and informed financial and business decisions.